Corporate Finance: Project Feasibility and Stock Valuation Analysis

This assignment delves into core corporate finance concepts, addressing topics such as present value calculations, bond interest computations under simple and compound interest scenarios, and weighted average cost of capital (WACC) determination. It further explores project feasibility assessments using Net Present Value (NPV), comparing mutually exclusive projects, and discussing the nuances between NPV and Internal Rate of Return (IRR) methods. The assignment also examines the overvaluation or undervaluation of stocks, contrasting fundamental and technical analysis approaches, using JB Hi-Fi as an example. References to key texts in corporate finance support the analysis throughout the assignment. Access more solved assignments and study resources on Desklib.

CORPORATE FINANCE
STUDENT ID:
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Question 1
a) The total present value of the future cash flows that are expected in the next 24 months can
be estimated considering the formula for determining the PV of annuity shown below.
Based on the facts of the situation, annuity payment = $ 3,600 and this would continue for 24
months with an underlying interest rate of 1% p.m.
b) The total amount paid as interest needs to be found under the following two scenarios.
a) Simple Interest
When the interest payable on the bond is computed as per simple interest, then the total
interest paid till maturity can be obtained by the multiplication of annual interest payment by
the maturity of the bond (Petty et. al., 2015).
Bond interest annually = (10/100)*$10,000 = $ 1,000
Interest on bond paid till maturity is stained = Annual interest payment * Maturity period =
$1,000*12 = $ 12,000
b) Compound Interest
In this case, the interest would be compounded and hence the quantum of interest every year
would keep swelling ensuring that the total interest paid over the 12 year period would be
higher than the amount estimated above. Essentially, the given situation could be viewed as
an interest annuity payment made by the company for 12 years whose value in the future
needs to be determined (Parrino and Kidwell, 2014).
c) The requisite weight corresponding to the various capital based on their respective market
value is computed in the manner shown below.

An example of the weight computation is indicated below.
Weight of ordinary shares = (46.6/91.9)*100 = 50.71%
For the various sources of capital indicated above, the corresponding costs are summarised
below.
On the basis of the computations performed in relation to the respective weight and cost
related to each of three sources of cappital, the following WACC computation is illustrated.
Question 2
a) Feasibility of the given project may be opined through the computation of Net Present
Value (NPV) which ought to be positive for the project to be financially feasible. Considering
the information provided, the relevant NPV computation is summarised below.
I would go ahead with this project as NPV has come out as positive.
b) Feasibility of the given project may be opined through the computation of Net Present
Value (NPV) which ought to be positive for the project to be financially feasible. In this
regards, the first task is to carry out a computation of the present value of labour cost savings
realised from the project over a 15 year period.

Based on the above computation and the initial $ 15,000 as investment, the following is the
NPV computation.
I would go ahead with this project as NPV has come out as positive.
c) In this scenario, the superior project ought to be selected since only one of the two projects
can be selected. It is apparent from the above computations that NPV is higher for Project A
and hence it would be preferred over Project B even though Project A is otherwise financially
viable (Brealey, Myers and Allen, 2014).
d) The statement made is false as it is not necessary that the results are same for NPV and
IRR in every situation. An exception occurs in projects where IRR provides multiple answers
owing to net cash inflow occurring after the initial outflow. In such a scenario, there is
difference in the recommendation by the two methods. In case of any divergence, NPV is
preferred (Parrino and Kidwell, 2014).
Question 3
There are essentially two necessary inputs to determine the overvaluation or undervaluation
of any given stock. These are indicated below.
 Market Price
 Fair Value
While market value for traded assets is easily determined, the same cannot be said about fair
value which involves some degree of subjectivity especially in future assumptions. Two
possible scenarios can arise which are summarised below (Brealey, Myers and Allen, 2014).
In order to illustrate the above, consider a listed stock named JB Hi-Fi. The current price in
the market is AUD 23. The stock would be overvalued if the fair value as per the given

market participant is lower than AUD 23 and undervalued if the fair value is higher than
AUD 23.
The fundamental and technical analysis tends to differ in the following ways (Petty et. al.,
2015).
 Underlying basis- Fundamental analysis is based on the idea that owing to market
inefficiency, the market price tends to deviate from intrinsic value and decisions to
buy or sell are prompted by this comparison. Technical analysis is based on the idea
that future prices of stock tend to be influenced by past prices and analysis of past
trends is done to determine the trend and key support and resistance zones.
 Since in the long term, the stock’s intrinsic value is attained, hence fundamental
analysis based stock decisions are meant over a long term horizon unlike technical
analysis which is essentially meant for short term positional trades.

References
Brealey, R. A., Myers, S. C. and Allen, F. (2014) Principles of corporate finance, 6th ed. New
York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. and Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education, French
Forest Australia